Telework & Taxes: Challenges for Employers

It’s tax season. Although filing personal income taxes may be a headache, it’s more of a burden for employers filing state corporate business taxes. How some states view telework have made things even more challenging for businesses in recent years. For example, in Telebright Corp., Inc. v. Director of Taxation, the Superior Court of New Jersey ruled that an out-of-state employer had to pay New Jersey corporate business tax for just one teleworker residing in the state.

Telebright Corp, Inc., a telecommunications software company based in Maryland, employed a software developer who moved to New Jersey when her husband landed a job there. Telebright agreed to let the employee telework from her new home. Although she was the only employee in the entire company working in that state, the New Jersey Division of Tax determined that Telebright needed to file corporate business tax.

According to New Jersey law, all out-of-state companies must pay taxes “for the privilege of doing business, employing or owning capital or property, or maintaining an office, in [the] State.” ‘Doing business’ is defined as “all activities which occupy the time or labor of men for profit.” Even though Telebright did not have any offices in New Jersey or solicit business there, the court ruled that having a teleworker present in the state constituted ‘doing business.’

Telebright tried to challenge the decision, claiming that taxing the company based on the presence of a single person would create an undue burden on interstate commerce (protected under the Commerce Clause). The court disagreed.

It’s important to point out that even if the employee was telecommuting part-time or if the equipment the employee was using (i.e. computer) did not belong to the company, the court’s decision would likely still be the same.

Unfortunately for employers, New Jersey is not the only state that taxes a business based on the presence of teleworkers. In a survey conducted in 2010 by the Bureau of National Affairs, 35 states said that an out-of-state employer may be subject to corporate business tax due to in-state teleworkers (although it is questionable whether other states have enforced this yet).

Taxation could present another barrier to telework, especially for small and medium size businesses that want the benefits associated with teleworking but cannot afford to pay the additional taxes. As the workplace evolves, state and federal laws need to evolve as well. Organizational leaders are encouraged to investigate the state laws where their teleworkers reside. Additionally, leaders can contact their local state representatives to push for new legislation that will not hinder teleworking.